Authored By Soumasree Banerjee, Certified Financial Advisor – The AZAD Programme
Following these 13 points can help you achieve your dream of financial freedom.
Being ‘Financially Free’ is a state when your heart and mind are free from money worries, about the ‘what-ifs’ of life. ‘Financially free in 7 years’ – it may sound impossible, but it is very much possible. Allow us to show you the path – how one can achieve financial freedom in her early age of life by following a few simple steps.
It doesn’t require hitting the lottery or inheriting huge wealth. It does not require being a brilliant investor either. There is no special knowledge required, but few people succeed. So what is the secret? Basic financial literacy and discipline i.e. Regular habits of saving and investing.
It is a proud moment for all of us when we start earning. But often we fail to make mature investment decisions which will help us in long run. Often we fail to keep aside even a small amount of money for an emergency need. The idea of investing should be started early – however small. Those starting early can avail benefits through the power of compounding.
Here are a few steps which can help you to be financial free in seven years:
1.Involve your spouse in financial planning: Most couples ignore discussing financial matters with each other. Ideally they should sit down and discuss about their current financial situation. Set & prioritize your goals. If both of you are working, consider both of your income and expenses for this exercise.
2.Figure out where you are currently: Before you start to worry about where you want to go in the future, you should figure out where you are standing today. This will help you to understand your situation better. List down all the assets that you own and what is your liability (loans). From that you can calculate your net worth (Assets – Liabilities). You will need bank statements, credit card statements, investments, insurance, loan records etc.
3.Track current expenses: Make a list of all expenses. This will help keep a track of your present monthly spends of various types. It will also help you to calculate how much money you spend and save right now. By doing this you can actually track your own cash flow. Successfully managing cash flow is your key to financial control. If you are spending too much, cut down the unnecessary expenses.
4.Spend as per the budget: This is the area that you need to take a close look. If your expenses are greater than your income, be alert and then cut down your expenses immediately. If you have a cash surplus, start allocating money to meet your goals right away. Budget your monthly expenses and stick to it. There is a rough-rule of 50:30:20, i.e. 50% of your income should be spend for household expenses, 30% for lifestyle and 20% should be investing for long term.
5.Debt-free life: Try to build a habit towards a debt-free life. Avoid taking personal loans and credit card over dues. If you are already in debt, clear the costly debts as early as possible. If you have a home loan, try to pay early. Save from your variable income and prepay a lump sum amount at the end of the year.
6.Set your goals: Start making investments towards a specific goal. Financial goals don’t just happen, you make them happen. Make realistic goals with a target date and amount. You have to think what kind of life you want to lead after 7 years and how you are going to organize your investments now to achieve them.
7.Path to achieve the goals: This is actually the strategy which will help you to meet your goals. How to invest your surplus, which instrument to invest etc. If you have identified your goals but you are in debt (high interest loan), should address that debt before you start investing for the future.
8.Habit of investing: The strategy of achieving your goals can be achieved if you invest your savings. Invest in instruments as per your goals. Proper mix of assets in the portfolio is important to achieve all goals.
9.Do you have adequate insurance cover?: Do you already have term life insurance and health insurance? Hospitalisation and medical expenses are rising, so having a proper health plan which covers all family members is very important. You need to take a term plan cover as per your income and dependents.
10.Do proper tax planning: Proper tax planning can help you with surplus investible amount. Make investments so that you can avail deductions u/s Income Tax Act. Take all deductions u/s 80C, 80CCD, 80D, Section 24(1)(vi) & Section 80EE (if you have home loan) etc. Do not just invest in any instrument to avail tax deduction that does not provide a good return.
11.Create an investment policy: Every professional financial plan includes an investment policy. This is actually recommendations how a portfolio should be invested. It helps to make you more disciplined investor. It also specifies what percentage should be invested in which asset class taking into consideration of time horizon of investments and risk bearing ability.
12.Stick to the plan for long term: To make your financial plan successful, you need to stick to your investments for a long time horizon as decided in the investment policy.
13.Review your plan regularly: Review of the financial plan is very important. It is actually a checkpoint where you can see whether you are investing as per the plan. Sometimes you may also want to make a small change in the plan as per your requirement.
Following the above steps will help you to achieve financial freedom much before your retirement years. Achieving financial freedom is an amazing goal that everyone should set for themselves. Do it today!